For retailers, closing stores may boost value

For many big retailers, closing individual stores is a better option than opening new stores when it comes to increasing firm value, according to a study online in the Journal of Retailing.

The study, one of the first to examine the effects of store openings and closures on company performance, found that closing outlets can increase the value of firms with high market share as well as older firms and those that advertise heavily.

“There is no silver bullet for increasing a firm’s value, but for a lot of firms closing stores is more beneficial than opening stores,” said Sriram Narayanan, study co-author and assistant professor of supply chain management at Michigan State University’s Broad College of Business. “When firms tend to close stores they typically shut down unprofitable stores and this allows them to refocus resources elsewhere.”

Narayanan and colleagues studied store openings and closures of 132 publicly listed, U.S.-based retailers from 1998 to 2009. The study included a cross-section of industries, including electronics, apparel and office supplies.

Chain retailers continually open and close stores to improve their performance. The study data, pulled from a period generally prior to the recession, showed that firms opened more stores (an average of 68 openings per firm per year) than they closed (24 closings per firm per year).

The study examined the effects of store openings and closures on a firm’s performance and found the effects are contingent on market share, advertising intensity, age and size. Specifically:

Opening stores decreased firm value as the retailer’s market share and advertising intensity increased. Closing outlets, on the other hand, increased value in both cases.

A firm’s age did not affect value one way or the other when new stores were opened. However, as a firm got older, closing stores increased its value.

When firms got bigger, opening and closing outlets both decreased firm value, although the negative effect of opening stores was larger than the negative effect of closing stores.

Firms that both opened and closed stores in the same year secured lower returns, on average, than firms that pursued only one or the other.

Because investors and analysts closely follow large firms, any change in strategic direction may appear to arise out of problems (e.g., opening stores because existing stores are unprofitable). But by increasing investor confidence, the researchers say, companies may be able curb the negative effects of opening and closing stores on company value.

“Firms should dedicate more attention to investor relations to ensure the market understands the planning behind store openings and closures,” the study says.

Narayanan’s co-authors are Raji Srinivasan and Debika Sihi from the University of Texas and Shrihari Sridhar from Penn State University.